Chinese stocks vs the S&P

By Kurt Brouwer

Take a look at these two charts from the folks at Bespoke. The first is a longer term chart that illustrates the outperformance or underperformance of the Shanghai Composite Index versus the S&P 500. When the blue line is going up, Chinese stocks are beating U.S. stocks. When the line heads south, U.S. stocks are doing better.

The Shanghai Composite Index is perhaps the broadest Chinese stock index. It includes all stocks listed on the Shanghai exchange. For more on the SSE, you can go here.

As you can see from the chart, beginning in 2005, the Shanghai Composite absolutely killed the S&P 500, rising much, much faster. Chinese stocks cratered in the financial panic of 2008 and then had a nice bounce. Since then, the S&P has significantly outperformed as this second chart shows.

Over the past nine months, the S&P is up considerably while Chinese stocks are down. Now, why am I telling you all this? The answer: diversification.

As I have written many times, diversification is an important tool for investors. I think an equity portfolio should routinely have both U.S. and foreign stock funds in it. Trying to rush in and take advantage of a hot market when it is soaring (such as Chinese stocks in 2007 or early 2008) would be hazardous to your financial health.

Instead, I recommend you have a diversified portfolio of U.S. and foreign stock funds and that you remain patient with them. When one market such as the U.S. is underperforming, just wait a bit.

About Fundmastery Blog

Kurt Brouwer is a fee-only financial advisor with three decades of experience. He is the chairman and co-founder of Brouwer & Janachowski, LLC. Kurt has written books, articles and hundreds of blog posts on mutual funds, ETFs and other investment topics. E-mail: kurt.brouwer *at* gmail.com.